Earlier this week, Potbelly Corporation (NASDAQ:PBPB) announced its fourth-quarter and full fiscal year sales. While the market doesn't usually act as a single entity, this time it did, and it was unimpressed. Weak sales left shares flapping in the wind and drove the stock's price down more than 10%. Most of the blame was heaped on factors outside of the business's control, with management citing weather and the government shutdown as major drags. If that's true, what can Potbelly do to avoid bad luck in the future?
Bad-news Bears -- and Nationals, I guess
Potbelly's store footprint is heavily concentrated in a few cities. Chicago's city limits contain more than 40 locations, while Washington, D.C., has more than 20. That means that around 20% of the company's total locations are accounted for in two cities. The October through December 2013 period saw a government shutdown in Washington and an exceptionally harsh winter in the Midwest.
Potbelly's concentration of locations makes it especially susceptible to local disruptions. Estimates from the Washington, D.C., city government put revenue declines at local restaurants around 7.5% during the shutdown. Potbelly almost certainly took a hit over the two-week shutdown, which not only affected government employees, but also put the kibosh on most tourist activity.
In Chicago, Potbelly's home city, the weather hasn't let up. Winter has punished small businesses, keeping customers at home. Again, Potbelly isn't immune to the movements of the broader market, and it seems unlikely that this quarter's results are going to show a stellar turnaround for those Midwest locations.
Expanding the business to mitigate risk
Potbelly's long-term plan is to open new "hub" markets every year-and-a-half or two years. These areas give the business a way to reach further into new regions using "spoke" markets that extend from the hub. As the company adds new hubs, the risk of weather, government, and other local disturbances disrupting the whole business drops.
Potbelly still doesn't have any locations in Florida or California -- not counting its California, Md., store -- leaving a lot of room for growth. At the same time, its slow-moving plan means the upside from any new openings is likely to take a while to be seen. This week's hit was a reflection of investors' concerns that the growth they hoped for is further away than they wanted, and that right now, the company is subject to the whims of weather and bad governance. Potbelly still has a lot of gas in the tank, but it's not speeding down the highway.
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Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.